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Exceptional Returns: Economic, Fiscal, and Social Benefits of Investment in Early Childhood Development

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Exceptional ReturnsOctober 2004 | EPI Book

Exceptional Returns

Economic, Fiscal, and Social Benefits of Investment in Early Childhood Development

By Robert G. Lynch

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Table of contents

Executive summary


Chapter 1: Overview of the benefits of early childhood development programs
Estimates of benefit-cost ratios for ECD investment

Chapter 2: The effects of ECD investment on future government finances, the economy, and crime
Budget effects of ECD investment
Economic effects of ECD investments
Crime effects of ECD investments
The validity of extrapolating from the Perry Preschool Project and issues raised by increasing the scale of ECD investment

Chapter 3: The potential impact of ECD investment on the solvency of the Social Security system


Appendix 1: Case studies of the benefits of investments in early childhood development programs
Appendix 2: Explanation of the methodology for estimating the budget, economic, and crime effects of investments in ECD

Executive summary

The youngest and most vulnerable children suffer the highest poverty rates of any age group in the United States. Nearly one in five children under age six lives in poverty, and the number is rising.

The problems for children and society that result from childhood poverty cry out for effective policy solutions. Poor children often have inadequate food, safety, shelter, and health care. In school, poor children too often fall far short of achieving their academic potential, making them more likely to enter adulthood lacking the skills to compete in the global labor market. As adults, they are more likely to suffer from poor health and participate in crime and other antisocial behavior; these children are also less likely to grow up to be gainfully employed and contributing to economic growth and community well-being.

There is a strong consensus among the experts who have studied high-quality early childhood development (ECD) programs that these programs have substantial payoffs. Although the programs vary in whom they serve and in the services they provide, most ECD programs offer wide-ranging education services as well as health services (such as immunizations and health screenings) and nutrition services, typically for children younger than six. Many also provide adult education and parenting classes for the parents of young children. Investments in high-quality ECD programs consistently generate benefit-cost ratios exceeding 3-to-1or more than a $3 return for every $1 investedwell above the 1-to-1 ratio needed to justify such investments. Even economists who are particularly skeptical about government programs make an exception for high-quality ECD programs. Follow-up studies of poor children who have participated in these programs have found solid evidence of markedly better academic performance, decreased rates of criminal conduct, and higher adult earnings than among their non-participating peers.

This study demonstrates, for the first time, that providing all 20% of the nation’s three- and four-year-old children who live in poverty with a high-quality ECD program would have a substantial payoff for governments and taxpayers in the future. As those children grow up, costs for remedial and special education, criminal justice, and welfare benefits would decline. Once in the labor force, their incomes would be higher, along with the taxes they would pay back to society.

A publicly financed, comprehensive ECD program for all children from low-income families would cost billions of dollars annually, but would create much larger budget savings over time. By about the 17-year mark, the net effect on budgets for all levels of government combined would turn positive. Within 25 years, by 2030 if a nationwide program were started next year, the budget benefits would exceed costs by $31 billion (in 2004 dollars). By 2050, the net budget savings would reach $61 billion (in 2004 dollars).

The timing of these fiscal benefits resulting from a nationwide ECD program should appeal to those concerned about the fiscal difficulties posed by the impending surge of retiring baby boomers. The substantial fiscal payoffs from investing in young children would become available to governments just as the wave of new retirements puts the greatest pressure on government resources. For example, the government-wide budget savings in 2030 and in 2050 from ECD investments begun next year would be enough to offset about one-fifth of the deficits in the Social Security trust fund projected for those years. This potential contribution to the solvency of the Social Security system would be achieved without raising social security taxes or cutting benefits.

The economic and social benefits from ECD investment amount to much more than just improvements in public balance sheets. By improving the skills of a large fraction of the U.S. workforce, these programs for poor children would raise the gross domestic product (GDP), reduce poverty, and strengthen U.S. global competitiveness. Within 45 years the increase in earnings due to ECD investments would likely boost GDP by nearly one-half of 1%, or $107 billion (in 2004 dollars). Crime rates and the heavy economic costs of criminality to society are likely to be substantially reduced, as well, with savings of about $155 billion (in 2004 dollars) realized by 2050.

The United States should be investing in high-quality early childhood development programs to improve the quality of life for millions of children, reduce crime, make the workforce of the future more productive, and strengthen the overall economy. The resulting budget relief gained by providing ECD services to poor children will ultimately contribute to funding some of the nation’s most pressing future needs.


At a time of fundamental disagreements in the United States over the nature of the country’s economic problems and their solutions, it is rare when a consensus emerges across the political spectrum on both the problems and the appropriate policy solutions. There is almost universal agreement among experts that too many young children—the most vulnerable members of our community—have inadequate access to food, clothing, shelter, health care, and clean, safe, crime-free living environments. In addition, too many of our children do not have access to high-quality educational opportunities or fall far short of achieving their academic potential while in school. At the very same time, however, there is a consensus among experts of all political stripes that high-quality investments in the education and health of young children would have huge long-term economic payoffs, both to our children and to soci
ety as a whole. Recent studies of high-quality early childhood development (ECD) programs have consistently found that investing in young children has many important benefits for children, their families, and society at large (including its taxpayers).

Although there are many ways to illustrate the deprivation experienced by children, one good indicator of the magnitude of the crisis is the statistics on childhood poverty. In 2003, fully 19.8% of all children under the age of six—that is, one out of every five kids, or some 4.7 million children—were living in poverty in the United States. This is up from 18.5%, or 4.3 million children in 2002.

To make matters worse, poor children grow up into adults who are more likely to engage in crime, use illegal drugs, abuse alcohol, neglect and abuse their children, and suffer from poor physical health and a variety of mental illnesses. They are also less likely to be gainfully employed and, thus, less likely to contribute to the growth of our economy. Poor children who fail to achieve their full academic potential are more likely to enter adulthood without the skills necessary to develop into highly productive members of society able to compete effectively in a global labor market. Less skilled, less productive, and earning less, when these children become adults they will be less able to help us sustain public retirement benefits systems such as Social Security, one of the most challenging problems we face in the future. In short, as has been documented by countless researchers, the consequences of childhood poverty on our collective economic health and well-being as a community are profoundly negative and thus should be addressed now.

This study estimates the likely benefits of investment in a high-quality, large-scale ECD program. Chapter 1 provides a brief overview of the benefits of high-quality ECD programs and reports the benefit-cost ratios that have been calculated for four such programs: the Perry Preschool Project, the Prenatal/Early Infancy Project, the Abecedarian Early Childhood Intervention, and the Chicago Child-Parent Center Program. This study also presents calculations on the effect a high-quality, large-scale ECD program for all poor three- and four-year-old children would have on future government budgets, the economy, and crime. Additionally, this study illustrates the potential benefit to the solvency of the U.S. Social Security system from ECD investment. Finally, Appendix 1 presents in more detail the benefits of investments in ECD programs. In particular, after a review of the general characteristics of ECD programs, Appendix 1 provides case studies of the benefits of the four high-quality ECD programs mentioned above and of Head Start, which is the largest of the ECD programs.

About the Author

Robert G. Lynch is an associate professor and chairman of the department of economics at Washington College, where he has taught since 1998. Previously, he taught at the State University of New York at Cortland, where he served as chair of the department of economics from 1991 to 1993. His areas of specialization include public policy, public finance, international economics, economic development, and comparative economics. In the past he has evaluated the adequacy and effectiveness of various state and local government economic policies, reviewed economic growth strategies, and analyzed the efficiency, fairness, and stability of state and local tax systems. Professor Lynch is also the author of several papers that have analyzed the effectiveness of state and local government economic policies in promoting economic development and creating jobs. He graduated with a B.A. degree in international and development economics from Georgetown University in 1979, earned a master’s in economics from the State University of New York (SUNY) at Stony Brook in 1981, and received a Ph.D. in economics from SUNY Stony Brook in 1984.

His most recent book for the Economic Policy Institute was Rethinking Growth Strategies — How State and Local Taxes and Services Affect Economic Development (2004).

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